Fading bull?

Factors that can keep it alive for a little longer

It’s been a remarkable run. As of Aug. 9, the U.S. bull market was 125 months old. That makes it the longest running bull since the Great Depression, by a considerable margin.

New York’s S&P 500 closed on Aug. 9 at 2,918.65. That’s a gain of 332% since March 9, 2009, when the index closed at 676, marking the nadir of the financial collapse that began in 2007. Despite a few bumps along the way, the overriding trend since then has been up.

(The end of a bull market is generally defined as a correction of 20% or more. The S&P 500 has come close, notably last December, but did not cross the threshold. The TSX bull ended in January 2016 with a drop of 23% from its high of September 2014.)

Now the question is how long can the Wall Street bull keep going? All bull markets must come to an end at some point and there are already danger signs out there, including an inverted yield curve, which often is a precursor of a downturn.

But if events unfold serendipitously, this one may have some life left in it. Here are five developments that could keep this bull run going.

An end to the U.S.-China trade war. At the recent G-20 meeting, U.S. President Donald Trump and Chinese President Xi Jinping agreed to a truce in their escalating trade war. That was modest progress but not a solution to the deep-seated problems between the two countries that are not only weighing on their economies but hurting global trade as a whole.

But the lingering uncertainty continues to restrain the markets. The truce appeared to disappear overnight recently as Trump triggered tariffs on an additional $300 billion in Chinese goods. It may be one of his bargaining tactics. A comprehensive trade deal signed by the two leaders at a summit later this year would provide a huge boost of confidence for investors and propel markets higher.

Lower interest rates. After its June meeting, the U.S. Federal Reserve Board signaled it would take a dovish approach to interest rates going forward. And in fact it went on to cut its benchmark rate by 25 basis points in July, leaving the door open for reductions to follow later in the year.

Theoretically, rate cuts should be bad news for the stock market, as they indicate a slowing economy is on the horizon. But some economists feel the Fed has increased rates too quickly in the past couple of years, threatening to choke off growth. That’s how the bull market of 1962-66 ended, according to CNN Business.

By easing now, the Fed would avert the possibility of a credit crunch and would encourage businesses to boost investing.

Positive quarterly earnings. The second-quarter reporting season is almost done. According to FactSet, 75% of S&P 500 companies have reported a positive EPS surprise and 57% of companies have reported a positive revenue surprise.

But earnings growth is casting a shadow. The blended earnings decline so far for the S&P 500 is -0.7%. If that becomes the actual decline for the quarter, it will mark two consecutive quarters of year-over-year declines in earnings since 2016. Third-quarter results will confirm whether declining earnings growth has become a worrisome trend.

An infrastructure deal. During his campaign, President Trump promised to implement a program to spend $1 trillion on infrastructure projects. Since then the number has grown to $2 trillion and Democratic Congressional leaders have indicated they are amenable to negotiations.

A massive spending program of this type would provide a huge boost to U.S. businesses and Canada might even benefit from some of the leftovers. But there are two sticking points. One is the reluctance of many Democrats to work with a President they despise on a program that he would claim as a personal victory. The other is money. The U.S. is already running a huge deficit. Yes, infrastructure is important but who’s going to pay for it?

That said, Mr. Trump would like to show some progress on this file. Even a modest initial plan would provide an economic boost.

Good news on pipelines. For the TSX, some encouraging news on the pipeline front would provide a boost to the embattled oil and gas sector. Energy stocks make up over 17% of the S&P/TSX Composite and the Capped Energy Index is down over 32% in the past 12 months. Anything that would boost the fortunes of those stocks would be welcome by most investors.

This could include shovels in the ground on the Trans Mountain Pipeline, some favourable judicial rulings on Keystone XL and Enbridge’s Line 3 to Superior, Wisconsin, and a settlement between Enbridge and the State of Michigan on the company’s Line 5 under the Straits of Mackinaw, which the State is suing to shut down.

If any one of these happens in the next few months, energy stocks could see a strong revival. If more than one comes to fruition, energy could be the TSX driver in the second half of the year.

This may be the longest running bull market in memory, but it doesn’t have to stop here. We just need a few tidbits of good news to keep it rumbling forward, at least for a while.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website. This column was originally published in The Toronto Star.

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